Where Does the DRS Fit in a Portfolio? - Bitly

The DRS as a distribution vehicle/fixed income surrogate ..... sector Bond and Non-traditional Bond, the DRS performs quite well. .... active and passive options.
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Where Does the DRS Fit in a Portfolio? The Roles the Swan Defined Risk Strategy Can Serve in a Portfolio Marc Odo, CFA®, CAIA®, CIPM®, CFP®

Where Does the DRS Fit in a Portfolio?

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WHERE DOES THE DRS FIT IN A PORTFOLIO? Over the course of many white papers, blog posts, and presentations, Swan Global Investments has made the case for the Defined Risk Strategy (DRS). Engineered to maximize up-market gains and minimize downside losses, the DRS is attracting attention from those seeking innovative solutions. Once one understands and accepts the DRS, the

next logical questions to answer are: 1. How much DRS should I add to an existing portfolio? 2. What role does the DRS play within a portfolio? Answering these two questions will be the focus of this paper.

HOW MUCH DRS SHOULD I ADD TO AN EXISTING PORTFOLIO? Core to the DRS’s value proposition is that traditional asset allocation models that rely solely upon diversification for risk management often come up short. It is Swan’s opinion that the largest threat to an investor’s wealth are large bear markets which can erase 20%, 30%, 40% or more of an investor’s net worth. Yet traditional asset allocation states that market risk is a risk that cannot be diversified away. In our opinion, any solution that does not address the biggest risk for investors is incomplete at best and irresponsible at worst. The Defined Risk Strategy is based upon the premise, “Always Invested, Always Hedged.” The majority of the DRS’s assets are established as a

buy-and-hold position in a given market. In order to protect against bear markets, long-term put options are bought on the buy-and-hold assets. The put options are inversely correlated with the movements of the long positions and are a way to directly mitigate market risk. So how does adding the DRS to a traditional strategy change results? We will start by adding 10% increments of the DRS to a traditional 60% S&P 500/40% Barclays U.S. Aggregate portfolio. The relative proportion of 60% equity to 40% bond is kept constant through each variation; the only change from portfolio to portfolio is additional 10% increments of the DRS.

July 1, 1997 – December 31, 2016

Return

Cumulative Return

Standard Deviation (Population)

Beta vs. Market

Excess Return vs. Market

Sharpe Ratio

Maximum Drawdown

Pain Index

Pain Ratio

60% S&P 500/40% Barclays Agg

6.54%

243.99%

9.16%

0.59

-0.31%

0.48

-32.54%

4.46%

0.99

60/40 Portfolio w/ 10% Swan DRS

6.78%

259.53%

8.74%

0.56

-0.07%

0.53

-30.12%

3.88%

1.20

60/40 Portfolio w/ 20% Swan DRS

7.01%

275.09%

8.42%

0.53

0.16%

0.58

-27.62%

3.37%

1.45

60/40 Portfolio w/ 30% Swan DRS

7.24%

290.62%

8.19%

0.51

0.38%

0.62

-25.05%

2.94%

1.75

60/40 Portfolio w/ 40% Swan DRS

7.45%

306.05%

8.08%

0.48

0.60%

0.66

-22.97%

2.61%

2.04

60/40 Portfolio w/ 50% Swan DRS

7.65%

321.33%

8.07%

0.45

0.80%

0.69

-21.16%

2.35%

2.36

60/40 Portfolio w/ 60% Swan DRS

7.85%

336.40%

8.18%

0.42

0.99%

0.70

-19.31%

2.14%

2.68

60/40 Portfolio w/ 70% Swan DRS<